ARTICLE | September 12, 2025

Federal Taxes: Uniform Across the Map

Clearly, at the federal level, your choice of incorporation state has no effect. A corporation formed in Delaware faces the same federal corporate income tax as one formed in Washington or California. The IRS still expects compliance with transfer pricing rules, federal income tax return filings, and payroll/withholding tax obligations. In other words, your state charter doesn’t change your federal tax rate or responsibilities.

Where the difference lies is in how individual states treat corporations—through corporate income taxes, gross receipts taxes, and annual franchise fees.

Delaware: The Investor’s Darling

Delaware has become synonymous with incorporation in the U.S., and for good reason. Its corporate law is highly developed, and its Court of Chancery provides a predictable environment for resolving business disputes. These features are especially appealing to investors, which is why venture capital firms often insist that companies reincorporate in Delaware before receiving funding, and why many Fortune 500 businesses are incorporated there.

From a tax perspective, Delaware does levy an 8.7% corporate income tax, but only on income earned within the state. A company generating revenue exclusively outside Delaware will not owe this tax. However, Delaware does impose an annual franchise tax on corporations, which can range from as little as $175 to several thousand dollars depending on company size and share structure (Delaware Division of Corporations).  Smaller corporations should definitely be careful when planning their share structure in Delaware to avoid unnecessarily high franchise taxes.

For high-growth companies seeking outside capital, the legal certainty and investor preference often outweigh the costs of maintaining incorporation in Delaware.  As noted later, Delaware can be good choice for corporations with extensive activity around the US, such as e-commerce companies.

Washington: No Income Tax, But Mind the B&O

Washington State presents a different model. Unlike Delaware or California, Washington does not impose a corporate income tax. Instead, it relies on a Business & Occupation (B&O) tax, which is levied on gross receipts rather than profit (an excise type of tax). That means businesses cannot deduct expenses, making this tax particularly tough on companies with low margins.  Certain other states including Oregon have similar taxes on gross revenue.

For example, retailing activities are taxed at roughly 0.471% of gross receipts, while service activities can be taxed as high as 1.75% for larger businesses (Washington Department of Revenue). For a business headquartered and operating primarily in Washington, this system can be more predictable than corporate income taxes—but it may also create unexpected burdens for companies with slim margins.

Please note that Washington’s most recent legislative session enacted some of the largest tax changes in the state’s history. These include updates to sales tax, B&O tax rates, and business classifications, with certain provisions taking effect as early as October 1, 2025. For additional details, please check our our other articles regarding WA tax law changes such as:

• https://insights.larsongross.com/project/washington-state-tax-reform-how-we-can-help/
• https://insights.larsongross.com/project/washington-state-tax-overhaul/

California and Beyond: The Cost of Doing Business

Most other states, like California, impose more traditional corporate income taxes. California levies an 8.84% corporate income tax, alongside an annual minimum franchise tax of $800, regardless of profit. For companies operating in California, incorporating elsewhere provides no shield. If your business has “nexus” (business presence) in California—such as employees, warehouses, or having significant sales to customers located there—your corporation may be required to file and pay California’s taxes and fees anyway.

States like Nevada and Wyoming are often touted for having no corporate income tax and minimal fees. These jurisdictions can be attractive for closely held companies that want low-cost structures. But once again, it is important to note that if nexus thresholds in other states are breached, taxes will be owed there regardless of state-of-incorporation choice.

California state is quite aggressive and will even send out demand-to-file notices to companies incorporated in other states, if a California address is used on the federal income tax filing. It is also important to note that certain cities (Los Angeles and Portland, for example) will impose local income taxes on companies having nexus in the city.

The Role of Nexus

As noted above, the concept of nexus is critical. Incorporating in Delaware does not exempt you from Washington’s B&O tax if your staff and offices are in Seattle, or if your company has significant revenue coming from Washington based customers. Nor does incorporating in Nevada excuse you from California’s income tax if your business is effectively operating in Los Angeles. In practice, many businesses end up paying taxes in multiple states: one for their state of incorporation, and another for the state in which they actually operate or have significant operations occurring.  Based on this, it can sometimes make sense to incorporate in the state where significant operations are occurring (e.g. incorporate where your manufacturing facility is going to be located).  It is generally not advisable to incorporate in a high tax state (like California or New York) or a state with gross receipts taxes (like Washington) if your business will not have nexus there.  For those businesses operating across multiple states, it generally makes more sense for tax purposes to incorporate in a low-tax state.

Strategic Considerations

So, does your state of incorporation matter? The answer depends on your strategic priorities. For businesses content to operate locally, incorporating directly where operations occur may reduce the burden of duplicative filings or needlessly paying state income taxes where your company is not doing business. For smaller or closely held businesses, including those planning to scale nationally, states with low annual fees and taxes like Delaware, Nevada or Wyoming may provide an efficient home.

Final Thoughts

When entering the U.S. market, a thoughtful evaluation of both where you incorporate and where you operate can make the difference between a smooth expansion and unexpected tax exposure.

Incorporation is not just an administrative step—it’s a tax and compliance strategy. Federal obligations remain the same, but state-level choices can shape annual costs, investor confidence, and operational simplicity. The best decision often comes down to balancing the legal advantages of a particular state’s corporation statutes, the operational realities of where a company will have nexus, and choosing to incorporate in a state that fits your company’s long-term goals.

The above tax laws, including rates and fees listed, are current as of the date of this article. Tax law is subject to continual change, sometimes on a retroactive basis. We recommend reviewing state tax law changes prior to making any final business decisions.